Fed's Lockhart: Fed May Have to Do More to Bolster Economy

Politics Reuters

The U.S. Federal Reserve may need to take further steps to push down borrowing costs if the economy weakens further, a top Fed official told the Wall Street Journal.

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"We are in a bit of a slowdown. It's hard to tell if this will be a temporary thing or more persistent," said Atlanta Fed President Dennis Lockhart, according to the paper, adding that it may take a few months to know with more certainty.

"I am more leaning toward the view further action would be a response to deteriorating conditions and a deteriorating outlook that could be conceivably caused by financial instability that might have an external source," Lockhart was quoted as saying.

Many economists believe fresh signs of weakness in the U.S. economy, including weaker job growth, will drive the Fed to a third round of bond purchases or quantitative easing, also known as QE3.

U.S. gross domestic product expanded just 1.9 percent in the first quarter, a level seen as too soft to bring down the nation's 8.2 percent jobless rate.

Europe's debt crisis, too, is seen as a serious risk to U.S. growth, should policymakers there fail to contain it.

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Last week the U.S. central bank -- which has kept short-term interest rates near zero since December 2008, and expects to keep them there through at least late 2014 -- eased monetary policy modestly by adding six months to its Operation Twist program.

The program is aimed at lowering long-term rates by exchanging Fed holdings of short-term securities for longer-term ones.

Fed Chairman Ben Bernanke has held out the possibility of more easing if the unemployment situation does not improve.

Other Fed officials have differing thresholds for action, from Dallas Fed President Richard Fisher, who repeated Thursday his view that the central bank has already done too much, to Chicago Fed President Charles Evans, who argued this week the Fed should be doing more.

Lockhart has a vote on the Fed's policy-setting panel this year and is seen a policy centrist.

Last week's decision by the Fed was an acknowledgement that the economy had weakened since April, Lockhart said in the interview.

Should unemployment rise, the economy threaten to tip into recession, or prices look set for a sustained bout of decline, more action could be needed, he said, adding that none of those scenarios are in his "baseline" forecast.